The Union finance ministry has done exceedingly well on the revenues front in the current financial year. In June 2010, it raised about Rs 1.3 lakh crore by auctioning licences for third-generation phone and broadband wireless access services. This was more than three times the revenue it had budgeted. Its target for disinvestment proceeds this year is also within reach. Already, it has collected more than half its annual target of Rs 40,000 crore. With the proposal for a follow-on public offer of shares for Indian Oil Corporation scheduled in March and a few others in the pipeline, the ministry would achieve that target too in the current year.
On the tax revenue front, the finance ministry’s performance has been even better. In most years, the last quarter helps the government mobilise more than 30 per cent of the annual target. However, this year the situation changed quite dramatically. The current year saw record collections in the first three quarters of 2010-11. By the end of December 2010, total tax collections amounted to 72 per cent of the annual target of Rs 7.45 lakh crore. In the normal course, mobilising the shore-up revenues, the finance ministry has now raised the annual target to Rs 7.82 lakh crore. The confidence stems from the general revenue buoyancy in the economy and the revenue department’s ability to collect more during the year.
This is bound to have a salutary impact on the government’s fiscal deficit for the current year. Finance Minister Pranab Mukherjee had projected a fiscal deficit of 5.5 per cent of gross domestic product (GDP) for the current financial year, a sharp drop from 6.8 per cent last year. It is now reasonably certain that he would not only meet the fiscal deficit target for the current year, but even reduce it further. The point to be noted here is that the deficit contraction plan would have gone awry if revenues had not exceeded the target set at the start of the year. This is because the finance minister has allowed his expenditure to exceed his Budget estimate. Strictly speaking, the finance minister is not directly responsible for the expenditure overshooting what was budgeted. The government’s political failure to rein in expenditure, thanks largely to its commitment to various rights and entitlements for underprivileged sections of society, was a major factor responsible for the pressure on the government on the expenditure front.
This is also why the Reserve Bank of India today is in a position to offer its considered advice to the government on how it should take a fresh look at its finances. In its latest monetary policy review statement, the central bank governor has indicated that the government’s challenge is not on the revenues front, but on how it can improve the quality of its expenditure. The central bank has even pointed out how the government’s flagship welfare programme, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), has potentially led to wage inflation. Even the wholesale price-based inflation rate for the full financial year is now going to be 7 per cent, compared to the earlier projected level of 5.5 per cent.
The central bank has hit the nail on its head. The government’s problem today is not its revenues. Thanks to a healthy growth rate, its revenues would remain buoyant. The problem is on the expenditure side. For a government, whose expenditure on the MGNREGS can go up by 50 per cent next year to Rs 64,000 crore or a little less than a per cent of the country’s GDP, the real challenge must rightly be how to control and reprioritise its expenditure. The central bank’s monetary policy review yesterday, therefore, has as much relevance for interest rates as for the government’s Budget for 2011-12.
In short, the challenge for the finance minister, as he prepares to present his next Budget in about a month, is how to respond to the demands for raising expenditure from various stakeholders in the government. Revenues are important in a different way. They need reforms — the introduction of the Direct Taxes Code and the Goods and Services Tax, for instance. However, the finance minister has to take tough decisions on the expenditure side. His options are limited, but even within those limited options, the finance minister has to send out the right signals to the economy that the government believes in prudent expenditure management. The Budget for 2011-12 can afford to focus less on the government’s revenues, but it does not have that luxury with its expenditure.
